Sunday, 14 February 2010

Economists line up with the Tories

Yesterday I asked if there wold really be another budget under Alistair Darling, many of you seemed to think not. Regular readers here will know that here at C@W we are in awe of the power of markets. Who could not be after htis latest financial crisis has pushed the world into its worst economic period of 2 generations?

This letter today though to the Times shows that those in the City are starting to get nervous about a Tory victory. For with Labour lie and spend approach the country will be begging from the IMF before the year end if they win an election. I don't say this because I want to scaremonger, it is just an analysis of where the country is; 13% deficits are simply unacceptable for another yearor two. Even a plan to get it down to 6% over 4 years is a below a bare minimum requirement. Just look at Greece this past fortnight if you want to see where a country gets too when it faces-off against the Market.

The economists realise this and they also realise the unsaid truth; unsaid by any party. That there are plenty of cutbacks, on pay and pensions and on non-jobs that would not add substantially to the lowering economic productivity. On the negative side, even Ken Clarke has talked about tax rises, but where can the UK go from here, we are already one of the highest taxed economies in the Western world?

Perhaps this intervention will have the effect of concentrating minds of voters in the UK; lying labour may say all the right things an the Tories are not perfect by a long way, but given the choice only one is a vote for gauranteed economic crisis.

31 comments:

The Times shows that those in the City are starting to get nervous about a Tory victory.

The essential problem is that there are three parties - the Cameron-Clarke Labour clones with one added difference - they make policy according to which way the wind is blowing and adopt Labour command and control tactics, then Labour itself [nuff said] and then the real Tories who have no voice.

Public sector cuts are difficult to implement when they'll result in a directly proportionate swelling of the dole queues. All it would do is render a large section of society unproductive and contributing less money into the economy.

However, the simplest way for the winner of the next election to regain some credibility is to stop worshipping before the credit boom cash-cow.

There is still an idea shared by both sides that if we can only get the extend-and-pretend credit boom restarted, we'll all be in clover this time next year.

In order to facilitate this outcome (as if given the right conditions the credit boom will spontaneously re-appear), we currently have soaring inflation and what is now not only one of the longest spells in economic history of unchanged interest rates, but at a record low of 0.5%!

It was the government's (*cough* I mean independent MPC *cough*) deliberate ignorance of inflation that brought us the credit boom and subsequent bust in the first place and over two years since the recession started, now they *still* seem to think that doing the same will somehow get a different (and much more favourable) outcome.

So, are the Bank of England slow learners or simple daft as brushes? Well, the single group that benefits the current situation the most are property-rich baby boomers because cheap credit underpins the housing market by allowing near-defaulting homeowners a low opportunity cost of simply doing nothing and remaining in their overpriced properties.

However, this is why Japan is still in deflation 25 years after their own peoperty-led credit boom and bust. The government has it in their power to end the recession by raising the price of money to sustainable levels (4% inflation should mean around 5% interest rates, remember?). But they won't do that because:

a) Baby boomers now own 4/5ths of the UK's 'wealth' in property and

b) MPs are property investors and incidentally ... baby boomers!

So in conclusion, the answer is very simple. Stop worshipping before the (long dead) credit boom cash cow and all of a sudden you'll start being taken seriously again!

I believe that having Labour remain in power will be in the long-term interests of the country. The inevitable economic collapse that would result would lead to their total extinction.

The brown stuff is in the air right now. If the Conservatives win the election it will hit right at the beginning of their watch and they will suffer the blame. If the Labour party remain in power the blame will be on those that deserve it.

If you cut wages and pensions you save huge chunks of money (65% of government spending is on wages) without causing more unemployment. Many of us in the private sector have lower living standards and wages than we did a couple of years ago.

Also, I am not convinced that paying people in non-jobs is better than having them on the dole. The money is all private sector or future wealth brought forwards. Putting non-jobs to bed and dealing with unemployment by reducing taxes and encouraging enterprise is a much better idea. These non-jobs are nicely spread out too, they are not like the coal mining jobs that losing a few will destory a town or city or region.

On the point of inflation, I don't see any real threat here. Too much money has been destroyed in the crisis. Interest rates at 4% would turf most people out of their homes tomorrow - what does that achieve apart from a vindicitive attack on the babyboomers (not hat I disagree on your point here that they have much to answer for, see some earlier posts of mine I think we will have serious violence or even civil war as a result of the baby boomers in 10 years of so).

As for the Tories, they were tought and have reigned n their rhetoric closer to an election; that worries me not so much.

Wishing a Brown victory is sick. The country could collapse as a result, I cannot condone wanting this to happen in thehope we can have a phoenix revival. Argentina never did, nor Rome etc etc.

"... there are plenty of cutbacks, on pay and pensions and on non-jobs that would not add substantially to the lowering economic productivity."

Exactly! If you think about it, the real cost to the economy is the sum ofa. the total output lost by having an extra three million taxpayer funded employees who could otherwise be doing something usefulb. the deadweight cost of the taxes needed to fund themc. the deadweight costs of complying with all the paperwork and regulations.

The total loss to the economy may be more and it may be less than a simple calculation of salaries + pensions + benefit - income tax deducted - cost of them being (hopefully temporarily) unemployed.

But there's no need to worry about 'falling demand', as Paul suggests.

If the shopkeeper's income goes down by £10,000 because the local leeches don't have so much money to spend AND his tax bill also goes down by £10,000, the shopkeeper still ends up better off, because out of that £10,000 turnover, he's only keep about £1,000 after costs and taxes.

And it's easy to get the private sector to employ more people - cut VAT, cut Employer's NIC and keep occupancy costs down by liberalising planning laws.

Problem solved. Unless you're the Tories, where this involved too much thinking and they'd rather hike VAT to 20% and save £100 million by restricting CHild Tax Credits for higher earners.

Surely the public sector bosses have already realised this. The council budgets for this year have already been squeezed. There is already a freeze on all recruitment, compulsory redundancies for the over 60's and spending ceilings. This is for the last "good year". They know next year and after is going to be very much worse.It seems that real managers are well aware of the millions that are going to be chopped from budgets.

Gentlemen, I have to say that I resent being termed a "leech" for teaching children with BESD (behavioural, emotional and social difficulties). Heaven knows, I can see plenty that needs doing better/differently in the public sector, but lazy, blase insult is not a worthy contribution to the debate.

I would rather there is a Rolf, indeed many Rolfs, helping children so frightened and unprotected by the circumstances they are in they become violent and severed from our values, than have the money saved by losing him.

I don't agree with that statement Paul. The reason Government spends is to acuire votes to have it re-elected.

Nothing to do with private or public sector - you are confusing two seperate ideas.

Now a government can, and indeed has, been elected with a view to shrinking the state and finding votes that way. However, the BBC is a big bulwark against this sort of thought as it is itself state funded.

The Tories need to follow this path and in their rather slow fashion of these days I think they will.

MW is right, private sector leeches are no better than public sector leeches. The answer s a smaller state with less taxes and less nannying all round.

Labour has increased spending hugely and proved beyond all doubt this time that it does not achieve its aims - time to try another path.

You've both given a subjective and emotive response to what is actually not a matter of opinion but fact.

The government's main transmission mechanism for getting money into the economy is through public sector contracts to build this-and-that. This in turn enriches private sector companies. And don't think you can make an easy distinction between those that get these contracts and those that don't.

Oftentimes the government operates a round-robin policy on minor contracts - meaning ALL of the bidding private sector companies get contracts sooner or later (regardless of ummm .. their managing directors political leanings, CU!).

Mark you may not like it and CU you may not agree but I can tell you it is a fact.

Returning to the fray... some contributors here are showing signs of ideological rigidity. Informed of the consequences of a global thermonuclear war, Mao said good, then there will be no more classes; a senior Nazi, dead set on the Final Solution, exclaimed irritably that "everyone has his good Jew". Instead of turning on each other, we might focus more profitably on preventing the money supply exceeding GDP, and generally bringing the banks under control; else it will happen all over again after we've cleaned up this mess.

BTW, I'm cutting down the teaching from 5 days to 3, to make time to relaunch my brokerage. There's an act of faith, if you like.

The idea that huge lumps cannot be cut off public spending without damaging productivity is total utter hogwash. Open your eyes, look around you. There is silly waste going on everywhere. Why are we paying think tanks to dream up silly ideas about cutting the working week, for example? Why are we replacing perfectly good paving stones for the sake of it? Why are we paying for the Indian space agency?

I reckon you could cut 10-15% off public spending without putting a single nurse, doctor, teacher, police officer, etc. on the dole.

As for pensions and pay well I for one don't get a penny in corporate pension. Why should someone who does a non-job? I haven't had a pay rise for two years, why should someone who spends all day thinking up new ways to bash the productive?

Unfortunately, the Tories don't need so much a nudge as a cavalry charge to get them to admit the truth, which is why there is some merit in the proposition that Labour's run should not be halted just yet.

And we don't need to be another Argentina or Rome, we can be another Britain 1979.

@El-Kevo: I'm not much more of a fan of labelling than you appear to be, and on a bad day I can be heard making references to the cane (and the rope). But there are certainly kids with problems that thrashing won't answer (though I might advise it in relation to their parents).

@CU: "they all get good pensions". Not so. Mine wouldn't keep you in wine.

@Rolf - I meant relative to salary. Many private sector workers get nothing. I am lucky to have a good job yet paying all my pension up as directed will still leave me with an income below minimum wage in retirement.

(Of course, as said previously I have no intention of retiring os perhaps it matters less to me)